We’ve been continuing to post model Dodd-Frank clawback policies for your reference as we approach the effective date & compliance date for the new listing standards that are required under Exchange Act Rule 10D-1. The latest addition is our very own sample, which was expertly drafted by Dave Lynn. You can find it – in both Word and PDF – in our “Clawbacks” Practice Area. That’s also where you’ll find links to the SEC rule and exchange listing standards, law firm summaries & analysis, and more.
Don’t forget that we will also have a panel devoted to this topic at our rapidly approaching “Proxy Disclosure & 20th Annual Executive Compensation Conferences” – which will be held virtually September 20th – 22nd. Here’s the full agenda for that pair of conferences. If you haven’t already registered, sign up today on our membership center or by emailing sales@ccrcorp.com – or by calling 1-800-737-1271.
The practical & insightful guidance that you’ll get at the Conferences will be key to helping you put the finishing touches on your policy, consider implementation mechanics, and prepare for all the issues that proxy season and SEC rulemaking are going to throw our way. What’s more, Conference attendees will have continued access to the video archives & transcripts for a year following the event – so you can continue to refer back to this essential guidance as you navigate year-end and proxy season. CLE credit is also available for the live event as well as the on-demand replays!
– Liz Dunshee
Unlike executive compensation – which seems to constantly move in the direction of more complexity – director compensation has become more straightforward over the years, with a move away from meeting fees in favor of annual retainers. This detailed Compensation Advisory Partners memo recaps compensation data for the largest companies – for the full board, committees & committee chairs, and lead directors. It also looks at other trends in director compensation arrangements, such as pay limits and stock ownership guidelines. Here’s an excerpt about baseline compensation for board membership:
– Total Fees. Median board compensation increased by 2.6%, to $320K.
– Pay Structure. Companies rely mainly on annual retainers (cash and equity) to compensate directors. Pay programs for large companies are simple and tend to not use meeting fees. This year saw a 50% drop in companies who disclose using meeting fees, excluding those with meeting thresholds in place, with only four companies now providing board meeting fees. We support this approach as it simplifies administration and the need to define what counts as a meeting, though it may not be appropriate in all situations. Among the four companies that do provide meeting board fees, three have non-standard ownership.
– Equity. Consistent with prior years, providing full-value equity awards (shares/units) is the standard, with only 2% providing stock options (one of these companies grants both stock options and RSUs). Almost all companies denominated equity awards using a fixed value and not using a fixed number of shares. Using fixed value is generally considered best practice as it manages the “target” value awarded each year. This is consistent with practices observed in prior years.
– Pay Mix. On average, total pay was comprised of 63% equity and 37% cash, which is consistent with findings during recent years.
– Form of Increase: 17 percent of companies disclosed increases to board cash retainers, while 34% of companies disclosed an increase to their annual equity grant.
If you’re looking to review your director compensation program – or if you’re considering recruiting one or more new directors – this is a good memo to review. The CAP team suggests these considerations:
– Communication and Education. Not all companies get this aspect of effective compensation programs right. Oftentimes, distributing a simple summary (or “cheat sheet”) of the director pay program to participants can be an effective tool, that limits misunderstandings and an help prompt questions, as well as support consistent understanding of the program, philosophy and rationale behind the program.
– Recruiting New Directors. As boards look to refresh and diversify their membership, this may be the time to re-visit initial at-election equity awards for new directors. At-election grants can be a way to differentiate your company’s pay program in the recruiting process without a more costly increase to standard director pay levels.
– Board Leadership Roles. Taking on the role of non-executive Chairperson, Lead Director or Chair of a major Board committee can come with considerable additional time requirements, responsibilities, and reputational risk, yet additional compensation provided for most of these roles only reflects a modest premium on the standard director pay program. Providing greater additional compensation for the role of Lead Director of Chair of a major Board committee should be considered, in recognition of the typical time requirements, responsibilities and reputational risk individuals in these roles take on.
– Stock Ownership Requirements. Many boards, especially among the largest companies, require equity-based compensation be deferred until retirement (i.e., termination of board service). While we support alignment of director and shareholder interests through equity compensation, a standard stock ownership guideline (e.g., multiple of annual cash retainer) may be a competitive advantage when recruiting new directors who may be more focused on current compensation.
We’ve posted additional practical resources on this topic in our “Director Compensation” Practice Area.
– Liz Dunshee
Over on the Proxy Season Blog on TheCorporateCounsel.net, I recently blogged about the 2023 US “Proxy Season Briefing” from Glass Lewis (available for download). In addition to stats and commentary on a number of proxy season topics, the Briefing notes that equity plan proposals had a rough year, with the number that failed to receive majority support at its highest level in five years. Glass Lewis suggests the following might be partially responsible:
Problematic board decisions to shield equity plan award recipients from the loss in share value may have had shareholders on edge when weighing equity plan proposals. At a time of continued market volatility, the practice of rescuing underwater stock options through repricing and exchange programs — in some cases without shareholder approval — increased.
But we can’t say this came without warning. Liz blogged about commentary from Glass Lewis this spring noting that the proxy advisor would be on the lookout for option repricing practices as part of say-on-pay and other votes this season.
– Meredith Ervine
In January, John blogged about the FTC’s proposed ban on the use of non-competes and the potential impacts on executive compensation programs. While the FTC’s proposal has yet to be adopted, there have been several state-level developments. This client alert from Meridian Compensation Partners notes that in July, “Minnesota became the fourth state (along with California, Oklahoma and North Dakota) to ban non-compete agreements. New York is poised to implement a similar ban. Other states, such as Colorado, Illinois, Oregon and Nevada, have recently passed laws that impose partial restrictions on non-competition agreements.”
The New York ban, awaiting the Governor’s signature, is one of the more restrictive bills. Bloomberg reported last month that the bill is facing some opposition — or at least lobbying groups and business associations are seeking exceptions.
For those looking to keep up with this rapidly changing area, we’re posting resources related to non-competes and actions by the FTC, NLRB and various states in our “Non-Competes” practice area here on CompensationStandards.com.
– Meredith Ervine
As we approach the effective date of the exchanges’ clawback listing standards, questions are rolling in about timing and compliance dates on our “Q&A Forum.” With respect to the exhibit filing requirement, we received this question (#1472):
As you indicate, the listing standards related to the new clawback rules become effective on October 2, 2023 and companies then have 60 days (December 1, 2023) to adopt a compliant policy. The final clawback rules include new Item 601(b)(97) which requires the filing of the clawback policy with the 10-K. The final clawback rules state that you have to comply with the disclosures requirements (e.g., filing the clawback policy as a 10-K exhibit) “in the applicable Commission filings required on or after the effective date of the listing standard” (i.e. on or after Oct. 2, 2023). My question is whether 9/30 filers will need to file the clawback policy with their Form 10-K filings many of which will be prior to 12/1? Do you agree that if an issuer adopts the clawback policy prior to filing the Form 10-K that it should include Exhibit 97 with the adopted clawback policy even if prior to 12/1?
John responded:
I think including the policy as an exhibit to the 10-K would be prudent, particularly in light of footnote 47 to the SEC’s approval of the Nasdaq listing standards:
“Listed issuers will need to have their recovery policy in place no later than 60 days following the effective date of October 2, 2023, which would be more than a year after publication of Rule 10D-1 in the Federal Register. Listed issuers will also have to comply with their recovery policy for all incentive-based compensation received by executive officers on or after the effective date of October 2, 2023, and provide the required disclosures in the applicable Commission filings on or after the effective date of October 2, 2023.”
The same language also appears in footnote 51 of the SEC’s approval of the NYSE listing standards.
With respect to incentive compensation granted prior to the effective date of the listing standards, we received this question (#1473):
Is it correct that the new rules apply to amounts granted or awarded prior to the Oct. 2, 2023 effective date if the financial reporting measure is attained after the effective date but during the 3-year lookback period?
And I responded:
Yes. See pages 122-125 of the final rule release.
– Meredith Ervine
This recent post on the Goodwin Public Company Advisory Blog was prompted by several questions related to best practices for filing a new equity plan or amendment after shareholder approval. The blog notes that the form — but not the final copy — of the plan is included with the proxy statement and recommends that companies file the final plan or amendment as an exhibit to the Item 5.02(e) 8-K instead of incorporating the form attached to the proxy statement by reference or waiting until the next 10-Q. Hopefully, this prevents that 10-Q exhibit from being overlooked. And this is just one of those small ways to make things easier on people navigating your EDGAR filings — it’s annoying to click an exhibit link and find yourself in a proxy statement!
Maybe most importantly, it also suggests that companies combine the equity plan disclosure under Item 5.02(e) with the 5.07 disclosure reporting the results of voting at the annual meeting. As a reminder, under CDI Question 117.08, when a plan is subject to shareholder approval, the 8-K filing is triggered by receipt of that approval (not the earlier board action).
This may seem obvious, but in the thick of first quarter reporting and closing out proxy season, your instinct may be to pull last year’s annual meeting 8-K and tweak the proposals but lose sight of the additional 8-K trigger in a year with an equity plan. As a basic proxy season blocking and tackling tip, one of the ways to avoid this — and to remember other infrequent annual meeting 8-K disclosures like the frequency vote — is to include notes and related reminders in your proxy season timeline, which you’re usually preparing while thinking through your annual meeting proposals and the related proxy-season implications.
– Meredith Ervine
Glass Lewis has opened its Q3 peer submission window. Any company can make changes during this opening, but it’s most relevant for companies with meetings between October & February – there will be another window for companies with meetings from March to September. Glass Lewis identifies a few reasons you would want to submit changes:
– Your company has a more recent public disclosure with an updated peer group than the most recently filed Form DEF 14A (e.g., on your website or a Form 8-K).
– Your company provided two compensation peer groups in your most recently filed Form DEF 14A, and you wish to clarify which peer group should be used by Glass Lewis. For example, in your most recent proxy statement, you include one peer group for 2021 and one peer group for 2022, the latter of which would be included in your 2023 proxy statement for 2022 compensation. In this case, Glass Lewis generally collects the 2021 data. If instead you wish for the 2022 data to be used, the peer group submission process allows you to update us with this information.
– Your company publicly disclosed your 2021 peer group and specific changes to the constituents of that peer group for 2022, without separately listing the 2022 peer group in full. In this case, Glass Lewis generally records the peer group for 2021 compensation, but the peer group submission process allows you to update this information with the 2022 peer group.
The window closes in at midnight PT on Sunday, August 20th. There is no need to submit peers if you believe Glass Lewis has details of your most recent publicly disclosed peer group. If you don’t participate in this update process, Glass Lewis will rely upon the compensation peer group that was disclosed in the proxy statement for your most recently held annual general meeting. Also, Glass Lewis says to focus on submitting the most relevant and publicly disclosed peer group used to set executive compensation levels. Do not include more than one peer group, and do not include private companies in your list of peers.
Here are more details about the proxy advisor’s peer group methodology. Glass Lewis has been using Diligent data & analytics since 2020 or so. The proxy advisor uses the company-selected peer group as a starting point for its own peer selection to evaluate pay and make say-on-pay voting recommendations.
As has been the case for the past few years, our “Proxy Disclosure & 20th Annual Executive Compensation Conferences” will include a session with the pay experts from both ISS & Glass Lewis. Don’t miss the chance to hear what issues are affecting their recommendations. Our conference is timed so that you can tackle issues head-on before your next annual meeting. Register today!
– Liz Dunshee
DEI-related goals have become one of the most common non-financial metrics in public company executive incentive plans. However, in addition to thinking through potential complexities and unintended consequences, you may also need to work with your employment law colleagues to take a closer look at those programs and related disclosures in light of June’s SCOTUS affirmative action decision, and related fallout.
To get more color on what executive compensation advisors should know, I’m delighted to share this guest post from Orrick’s J.T. Ho, Mike Delikat, John Giansello and Bobby Bee:
On June 29, 2023, the Supreme Court found Harvard and UNC’s admissions policies, which considered race and ethnicity as factors in admissions, to be unlawful under Title VI of the Civil Rights Act of 1964 and the Equal Protection Clause of the Fourteenth Amendment. While this ruling does not directly impact corporate DEI programs due to existing legal prohibitions on considering race in employment decisions, this case may embolden more applicants, employees, government officials like state Attorneys General and conservative activist groups to bring “reverse discrimination” claims and shareholder demands and proposals, a trend that already is on the rise.
Executive compensation programs that include DEI performance as a metric have already been and may continue to be a source of such claims and attacks. Many executive compensation programs in recent years have incorporated DEI metrics due to institutional investor demands. Such goals are often tied to increasing the number of women or diverse employees by a certain percentage, especially in higher-paid roles or retaining a certain percentage of such groups of employees, and have become more formulaic and rigorous over the years due to investor scrutiny.
However, while “the devil is in the details,” incorporating DEI metrics into executive compensation programs can lead to the risk that managers perceive the achievement of the metrics as a de facto quota and impel employment decision-making based on diversity metrics instead of individual qualifications and job performance—or the reasonable perception thereof, which could give rise to reverse discrimination claims. For example, in Frank v. Xerox Corp. (5th Cir. 2003), where the Fifth Circuit reversed summary judgment for Xerox on a reverse discrimination claim, the court noted that “[s]enior staff notes and evaluations also indicate that managers were evaluated on how well they complied with the [diversity] objectives,” among other factors. As a result, the Fifth Circuit noted a jury could find the company “had considered race in fashioning its employment policies” and that because of plaintiff’s race, “their employment opportunities had been limited.” According to the EEOC amicus brief filed on appeal, managers were evaluated on how well they followed and adhered to diversity objectives in making personnel decisions; numerical targets were considered in hiring, promotion or pay decisions; and money designated for merit pay increases was allocated based on achievement in specific “EEO categories.”
The court arrived at a different conclusion in Coppinger v. Wal-Mart Stores (N.D. Fla. Oct. 25, 2008), where the plaintiff alleged, among other things, that Wal-Mart tied manager bonuses to its diversity program involving two components: (1) placement goals, which measured the disparity between the rate at which women and minorities apply for managerial positions and the rate they obtained such jobs, and (2) good faith effort goals, which required all salaried managers to mentor three employees from diverse backgrounds and attend at least one diversity event each year. Although the court granted Wal-Mart’s summary judgment motion, the court noted that it did so because, despite the allegations, “no part of any decisionmaker’s bonus or compensation was related to placement goals or good faith efforts goals other than attending one diversity event each year.” Although the court concluded that the plaintiff had failed to point to any record suggesting that managers took the goals into consideration when making any employment decision, it left open the question of whether it would have held differently had such goals been more concretely tied to the managers’ evaluations or bonuses.
While there are few cases in this area to date, in light of the recent Supreme Court decision, companies who incorporate DEI metrics into executive compensation programs should do a privileged evaluation of their programs to determine whether their goals actually impact individual employment decisions, which can be problematic, or merely inspire broader initiatives, such as improvements in outreach and in the composition of candidate and interview pools or evaluation techniques, which is legally permissible. In other words, rewarding executives for their overall efforts on DEI rather than for achieving targeted metrics will mitigate some of the legal risk.
Further, whether goals involve hiring or retention is also relevant as what leads to employee retention is a complicated set of factors, including organizational culture, effective leadership and employee perceptions of working conditions, and it is often difficult to connect goals related to retention to any individual employment decision in hiring, promotion, termination or salary and benefits. Such analyses are complicated, and companies are advised to seek legal counsel and the benefits of privilege to ensure that factors that mitigate against the risk of reverse discrimination claims are being considered and implemented when constructing executive incentive plans.
This is certainly a challenging area, and we’ll be discussing practical ways to approach it at our virtual conferences that are coming up in less than 2 months – the “2nd Annual Practical ESG Conference” and the “Proxy Disclosure & Executive Compensation Conferences.” Here’s the action-packed agenda for the Proxy Disclosure & 20th Annual Executive Compensation Conference. Get guidance on navigating DEI oversight, disclosures & goals during these two panels:
– “Human Capital Management: Facing Down Heightened Complexities & Disclosures” – with Skadden’s Ryan Adams, Kirkland’s Sophia Hudson, Vontier’s Courtney Kamlet, and Aon’s Laura Wanlass
– “ESG Metrics: Beyond the Basics” – with Orrick’s J.T. Ho, Semler Brossy’s Blair Jones, Davis Polk’s Kyoko Takahashi Lin, and Pay Governance’s Tara Tays
Register today for this can’t-miss event. Bundle your registration with our “2nd Annual Practical ESG Conference” to get all the info & perspectives you need at the best price!
– Liz Dunshee
Here’s an update from Gibson Dunn on how “pay equity” shareholder proposals fared this season:
The number of shareholder proposals calling for a report on the size of a company’s gender and racial pay gap and policies and goals to reduce that gap increased during the 2023 proxy season. In 2023, shareholders submitted 16 proposals (up from nine proposals submitted in 2022), including two resubmissions to companies that received pay gap proposals last year. Six gender/racial pay gap proposals were submitted by Arjuna Capital and 10 were submitted by James McRitchie and/or Myra Young. Average support for these proposals decreased in 2023 as compared to 2022: the nine proposals voted on in 2023 received average support of 31.7% (with none receiving majority support), a significant decrease from average support of 42.6% for the five proposals voted on in 2022 (with two receiving majority support).
Six proposals were not included in the company’s proxy statement, with one proposal withdrawn after the company agreed to disclose quantitative median and statistically adjusted pay gaps. Each of these proposals targeted unadjusted pay gaps. In addition, where the company did not already provide adjusted wage gap information for comparable jobs (i.e., what women and ethnic minorities are paid compared to their most directly comparable male and nonminority peers, adjusted for seniority, geography, and other factors), the proposals requested that the company also provide adjusted pay gap disclosure.
Even though these proposals aren’t garnering significant shareholder support, other trends & developments mean that corporate leaders and advisors must continue to pay attention to “pay equity” – while also approaching any policies and disclosures carefully so they aren’t perceived as being discriminatory. Meredith blogged a few weeks ago about data collection tips to ensure that any information that you disclose is accurate & consistently calculated. When it comes to disclosure examples, Arjuna is still publishing its annual “Racial & Gender Pay Scorecard” – and for the first time in 6 years, Arjuna awarded a perfect score to a company for its disclosure.
– Liz Dunshee